Conservation easements involve a landowner donating a permanent easement on the land to the government or qualifying organization, which preserves land by preventing future development and permanently restricting its use. Donation of a conservation easement can allow for a tax deduction, provided that specific requirements are met, some of which include:
- Preserving the land for outdoor recreation or education;
- Preserving a natural wildlife habitat;
- Preserving open space for the enjoyment of the public or according to a federal, state, or local governmental conservation policy; or
- Preserving a historically important land area.
If the requirements are met, and the easement otherwise qualifies, a donor of one of these easements can use it as a tax write-off. However, exploiting this tax deduction quickly took off, according to the IRS. So-called syndicated conservation easements were high on the IRS’s annual “Dirty Dozen” list of tax scams in 2019—along with other bad guys such as falsely padding deductions on returns and offshore tax avoidance. As a result, the IRS has been cracking down on what they call abusive programs designed to game the system and has disallowed many such deductions.
Promoters and broker-dealers behind syndicated conservation easements promise clients big tax deductions. The playbook looks something like this: Acquire a piece of undeveloped property in a rural area and then transfer the property to an entity, like an LLC or limited liability company. Membership or interest in the LLC is offered through brokers to investors, who then buy into the LLC with the expectation of taking a significant tax deduction once a conservation easement on the land is donated to a qualifying organization, all for a total of much greater than the original purchase. Then, a highly inflated appraisal is obtained for the “highest and best use,” often the post-development value, and an easement granted in favor of an apparent qualifying conservation entity, with the new partial “owners” taking their share of deductions based on the new appraised value.
The IRS took notice of the jump in deductions under syndicated conservation easements and has been targeting these programs, finding various reasons such programs fail to qualify under the tax code. The IRS decisions are being challenged and appealed, which can be a lengthy process through various levels. If the IRS ultimately prevails, individuals who bought into syndicated easement programs will have their deductions rejected and can owe significant taxes and penalties. Although numerous cases are pending in Tax Court, all eyes have been on the EcoVest Capital case brought by the DOJ against a large syndicated easement promoter, targeting what it calls the abusive tax scheme. The outcome of this case will likely set a precedent for the pending IRS disputes for many other similar syndicated conservation easement programs and IRS actions in the future.
How does this impact the insurance industry?
With the steadily increased IRS crackdown, some investors look to blame those involved in the creation and promotion of syndicated easements, filing suits or making claims against those involved in the process. Many of these lawsuits, while technically premature as the investors haven’t owed the IRS additional taxes or penalties yet, are resulting in claims against the broker dealers offering investment in the programs and, in some cases, the lawyers, accountants, promoters, and other professionals involved in the creation and handling of the syndicated easements. These professionals have, in turn, been filing claims under their professional liability insurance policies, and significant fees can be incurred in defending such claims alone.
As the IRS continues to target these syndicated conservation easement programs and reject the hefty deductions sought, more lawsuits and professional liability claims will likely come.
What should carriers and agents look for when partnering with law firms?
When partnering with new law firm clients, carriers should take a deeper look at the firm’s client portfolios, such as their involvement with high net worth clients, real estate portfolios, estates and trust, retirement, securities work, and private placements. Such clients could have been involved or had a part in syndicated conservation easement schemes.
AmTrust is aware of the current market trends involving syndicated conversation easement and the IRS rulings in these tax cases and continues to keep an eye on these and other potential trends.
This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Michelle Concepcion handles E&S professional liability claims in AmTrust’s Global Specialty section, servicing insured law firms, real estate brokers, and other professional risks, in resolving E&S claims nationwide. Prior to her role at AmTrust, Michelle worked in private practice litigating cases throughout Florida on behalf of insurance carriers, municipalities, and self-insured businesses throughout Florida, many through trial, and representing insurance carriers in coverage matters.
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